The spoken word applies!
German machine tool industry still gaining momentum in 2017
· Sector doing well in a less-than-easy business environment
· Technologically well equipped for the future
Statement by Dr. Heinz-Jürgen Prokop, Chairman of the VDW (German Machine Tool Builders’ Association), speaking at the organisation’s annual press conference in Frankfurt am Main on 2 February 2017
Ladies and gentlemen,
May I bid you a most cordial welcome to the VDW’s annual press conference. We are delighted to host you here today, and to be able to discuss with you the situation of the German machine tool industry and its prospects.
Before I come to the ongoing situation, please permit me some introductory remarks.
Business cycles are losing their relevance
For many years, the development of the machine tool industry had been cyclical in character. Substantial upturns were repeatedly followed at two-year intervals by extreme downturns. For years now, this hitherto characteristic cyclical succession has been practically overridden: instead, it is observable that the growth curve is being largely smoothed out. The sector is advancing in small steps from one production record to the next. The reason behind this trend is that more and more newly industrialising countries, chief among them China, are investing more heavily in production technology for upgrading their industrial base. The ASEAN region is another striking example here. The demand for machine tools in China has now stabilised on a lower growth trajectory.
Nowadays, moreover, exogenic factors are interrupting this pattern: developments in economic policy are superimposed upon the previous business cycles, and thus counteract the classically steep cyclical upturns. We are currently experiencing this once again with the numerous turbulences around the globe. Investors are uneasy, and putting their projects on the back burner. This in its turn means that the global market for machine tools is growing more slowly than it was years ago. Nonetheless, the German machine tool industry is successfully holding its own in this volatile business environment. The reason for this is not least the sector’s leading technological status internationally. Its products are much in demand, particularly when high-tech, strategic investments or intricate problem-solving are involved.
Globalisation favours the European capital goods industry
Against this background, it may seem surprising that Europe, of all places, has for years now been able to maintain its position as the most important sales region for German manufacturers, with consistently high growth rates. The Eurozone has evolved into a cornerstone of Germany’s machine tool sales.
Why is this the case? After all, years ago Europe was already being described as a saturated, and concomitantly less-than-dynamic market. But German and European machine tool companies, in particular, following a severe slump in 2009, have managed to regain lost ground in a vigorous process of catch-up. Europe is characterised by a strong capital goods industry, which has been able to benefit from the globalisation of major customer sectors like the automotive industry.
German machine tool companies are likewise giving more and more preference to manufacturing their products abroad, so as to enable them to serve their customers on the spot as well. According to the most recent figures from a survey commissioned by the VDW, around 8,800 staff were additionally producing machines worth almost two billion euros. And the uptrend continues. This is also helping them to secure the future of their facilities in Germany.
Machine tool sales decoupled from market trend
Ladies and gentlemen, the position of the German machine tool vendors is particularly well illustrated in the two premier markets of China and the USA. In both these countries, they have recently been achieving above-average growth in order bookings, contrary to the market’s general trend. From China, for example, our manufacturers increased their orders by 30 per cent in the first nine months of 2016. These primarily involve project business with automakers and their component suppliers. German vendors are becoming progressively more successful in gaining Chinese OEMs as customers as well: a clear indication that China is undergoing a politically motivated structural transformation, and increasing its investment in higher quality and automation, so as to become internationally competitive. With concomitant direct benefits for German vendors.
USA depends on machinery imports
Now you will doubtless be asking: how will the US market develop in future under Donald Trump? Since he took office a good two weeks ago, the headlines have been dominated by gloomy scenarios and a constant stream of speculations and fears. The USA, with a machine tool consumption of 7.5 billion euros, is the second-most-important market worldwide, but only about a third the size of China’s. More than 60 per cent of the USA’s requirements is covered by imported machines. After Japan, Germany is the second-ranking supplier, with a share of most recently 16 per cent.
There is meanwhile a frequent shortage in the USA of performatively capable product portfolios covering the entire spectrum of machine tool technology. But if President Trump wishes to deliver on his promises to bring back competitive industrial jobs, he will have to depend on imports of high-tech equipment, primarily from Germany, for the production lines involved.
Oxford Economics, too, the VDW’s forecasting partner, is confident that the USA cannot in future do without high-precision technology “Made in Germany”. It can therefore be anticipated that sales in the USA will in the medium term show no significant decrease, and that German manufacturers will also continue to be able to generate substantial turnover there. The USA is Germany’s second-most-important sales market, with an export volume of most recently around 935 million euros. Nevertheless, protectionist tendencies following the new president’s inauguration, with their effects on the NAFTA land of Mexico, which has most recently been performing extremely well, are being observed with considerable concern.
Mission accomplished for the sector in 2016
After this introduction, I will now address our sector’s performance in the past year and the VDW’s forecast. First the good news: according to the provisional results, the German machine tool industry achieved a production volume of 15.2 billion euros in 2016. This corresponds to an increase of around one per cent. So following a record year in 2015, our sector can once more report mission accomplished, right in line with our expectations of around a year ago, at what is again a very high level. The companies concerned have thus impressively succeeded in holding their own despite an extremely difficult macro-economic environment.
In comparison to forming technology, metal-cutting contributed three-quarters by volume to the year’s result. But following a strong year in 2015, it ultimately fell by one per cent. The manufacturers of forming technology, by contrast, following a weak preceding year, regained ground with a plus of three per cent. Service support, focusing mainly on maintenance, was the principal growth driver, with an overproportional rise of seven per cent.
With an export ratio of 66 per cent, and a fall of three per cent to their present approximately 9.1 billion euros, exports made a somewhat weaker contribution towards the result for the year than did the domestic market. The ongoing decrease in exports is attributable to markedly subdued demand from China in the preceding year of 2015. Nonetheless, China remains the most important sales market for German machine tools. Almost a fifth of them went to the Middle Kingdom in 2016 as well.
Within the triad, Asia finished 2016 with a minus of six per cent. Nonetheless, business with Japan and countries in the Middle and Near East, including Iran, Saudi-Arabia and the United Arab Emirates, was highly successful, and in each case contributed high growth rates to the sector.
The European market was also down, by two per cent, though the Eurozone, with growth of eight per cent, achieved a significant rise. This growth has been predominantly underpinned by Italy, Poland, France and Spain. While Brexit did not at first show up in the export figures, its consequences are now becoming manifest. Following years of growth, exports to the UK recently slumped by 15 per cent. Other problem children in Europe include Russia and Turkey. In these two countries, German deliveries fell by 34 and 20 per cent respectively.
America as a crucial sales region for German machine tools finished 2016 with an overall zero. The USA, however, did well, with exports to there up by nine per cent. Mexico, though top of the class in the preceding years, had a hard time in 2016, and saw exports fall by eleven per cent, more as a base effect. In Brazil, there is not much prospect of improvement, even in the long term. Most recently, the fall in exports totalled almost 40 per cent.
Impressive growth in domestic consumption
Machine tool consumption in Germany, up by four per cent, grew significantly faster than production output. This was of crucial benefit to domestic sales, while imports stagnated in the same time period. The import ratio came to around 41 per cent in 2016. Often, imports from particular countries are attributable to the closely intermeshed supply relationships between German manufacturers and their subsidiaries abroad. The top supplier nations are still Switzerland, Japan and Italy.
There is more good news: in 2016, employment in the German machine tool industry, as in the preceding years, remained high. Averaged over the year as a whole, 69,000 people were employed in the sector. This is a clear indication that even in times of global uncertainty our firms are retaining their excellently trained specialist staff and are thus well equipped to meet and master the challenges of tomorrow.
Capacity utilisation averaged 88 per cent over 2016 as a whole, continuing at the preceding year’s level. The most recent figure available, from January 2017, shows a modest rise, at 89.1 per cent. The order backlog, at 6.9 months, was slightly up on the figure for 2015.
German manufacturers lead the world
In the context of international competition, too, German machine tool manufacturers continue to lead the pack. In 2016, they succeeded in becoming export world champions, well in front of Japan. Excluding parts and accessories, the manufacturers achieved an export result totalling 7.6 billion euros. Japan, the previous year’s champion, suffered heavy losses of more than a fifth, and finished at 6.3 billion euros. In 2015, Japan was still just in front of Germany, with export revenues 200 million euros higher. The reason for the slump in Japan is the weakness of the Asian sales market, particularly the throttled level of Chinese demand, previously focused on standard machines.
Not only in terms of exports, but of production output too, Germany ranks among the world’s leaders. In 2016, we once again went head to head with Japan. According to the provisional figures, Japan, with a minus of five per cent and 11.4 billion euros, is set to remain only just in front of Germany, with its 11.25 billion euros. The undisputed leader in terms of production output is and remains China, which with 16.5 billion euros, continued at roughly the preceding year’s level.
Production output expected to rise by three per cent in 2017
So much for last year. And what are the prospects for 2017? There are some indications that the global business cycle may show a modest recovery despite the choppier waters it has to navigate. According to Oxford Economics, international industrial production output is set to show a moderate increase of 3.3 per cent over the preceding year. This will mean that global demand for machine tools will stabilise once more. Consumption is predicted to increase by two per cent. For the German machine tool industry, the economic researchers are even anticipating a three-per-cent rise in production output, to 15.6 billion euros.
This optimistic prognosis is also supported by an uptrending Purchasing Managers Index, which by the end of 2016 had risen to 52.7 points worldwide. An unequivocal signal for growth, since figures above 50 signify positive prospects. This applies particularly to the premier markets of China, the USA und Europe, which according to the index are all on course for growth.
Good order situation fuels justified optimism
The forecast has also been influenced by a comfortable order backlog from 2016. By November, orders had risen by seven per cent. The high level of demand was being driven primarily by exports, while domestic orders continued at the preceding year’s good level. Overall, the German machine tool industry is benefiting from high-volume project business, driven by the automotive industry for China, the USA and Mexico.
In the first three quarters of 2016, orders in all regions of the triad showed double-figure growth.
The EU has since 2014 been recording consistently high growth in demand. This is set to continue in 2017, though more weakly. In the first three quarters of 2016, for example, German manufacturers upped their orders by an impressive 17 per cent. This is primarily attributable to orders from Southern Europe. Markets like Sweden, the Netherlands, Poland and Austria also achieved substantial rises.